HIGHLIGHTS

• Market falls on mayhem in Washington.
• Debt ceiling needs to be increased by October 1.
• Poor market reaction to positive earnings reports.
• Growth around the world is solid.
• North Korea backs down.

MARKET PERFORMANCE

The market could no longer ignore the avalanche of bad political news. After falling 1.4% last week, all seemed like it was back to normal on Monday, Tuesday, and Wednesday as the S&P 500 advanced 1.1%. But the combination of Trump’s Charlottesville’s comments, the possibility of the departure of National Economic Council director Gary Cohn and the general mayhem in the White House led to a sell off on Thursday and Friday. Trump’s business advisory councils disbanded after his ambiguous comments regarding the neo-Nazi’s, the KKK and the white supremacists at Charlottesville. And a viscous terrorist attack in Barcelona did nothing to help.

For the week, the S&P 500 was down 0.65%. US equities have now put in a lower high and lower low. So, we have the makings of what might become a pullback. For now, though, the damage on the large cap indexes has been limited, the S&P is only down 2.23% from its high on August 7 of 2480.91.

DEBT CEILING

Forget healthcare reform, forget tax reform, Congress has a deadline to raise the debt ceiling by October 1 or the country will likely default on its debt sometime in October.

EARNINGS

S&P 500 companies that have beaten analysts’ earnings estimates have declined by 0.3% during the period that started two days before and ended two days after the earnings announcement, per FactSet. That compares to a 1.4% average increase over the prior five years. This probably indicates that investors are more weary of high equity valuations. Although during late July of 2006, the market had a somewhat similar reaction to earnings and then managed to put in another big rally.

GLOBAL/US GROWTH

The global growth story continues, real GDP was up at an annualized pace of 4% in Japan, 2.2% in the euro zone and 4.3% in eastern Europe. In the US, positive economic news increased Q3 GDP growth estimates to 3.80 from 3.50% from the Atlanta Fed’s GDPNow model and the NY Fed’s Nowcast increased to 2.09% from 1.96%.

NORTH KOREA

On Monday, North Korean leader Kim Jong-un said he would watch what “the foolish Yankees” do before taking any action. This is Jong-un’s way of lowering the stand-off. At the same time, South Korean President Moon Jae-in urged the US not to launch an attack without its consent. The defense agreement between the US and South Korea required that they must “consult together” if either country is threatened. Both moves should help alleviate the tension.

SCOREBOARD